Carbon pricing and GHG stabilization

Virtually everyone acknowledges that the best way to reduce greenhouse gas emissions is to create a price for their production that someone has to pay. It doesn’t matter, in theory, whether that is the final consumer (the person who buys the iPod manufactured and shipped across the world), the manufacturer, or the companies that produced the raw materials. Wherever in the chain the cost is imposed, it will be addressed through the economic system just like any other cost. When one factor of consumption rises in price, people generally switch to substitutes or cut back usage.

This all makes good sense for the transition from a world where carbon has no price at all and the atmosphere is treated as a greenhouse gas trash heap. What might become problematic is the economics of the situation when greenhouse gas emissions start to approach the point of stabilization. If we get 5 gigatonnes collectively, that means a global population of 11 billion will get about half a tonne of carbon each.

Consider two things: Right now, Canadian emissions per person are about 24.3 tonnes of CO2 equivalent. Cutting to about 0.5 is a major change. While it may be possible to cut a large amount for a low price (carbon taxes or permits at up to $150 a tonne have been discussed), it makes sense that people will be willing to pay ever-more to avoid each marginal decrease in their carbon budget. Moving from 24.3 tonnes to 20 might mean carrying out some efficiency improvements. Moving from 20 to 10 might require a re-jigging of the national energy and transportation infrastructures, carbon sequestration, and other techniques. Moving from 10 to 0.5 may inevitably require considerable personal sacrifice. It certainly rules out air travel.

The next factor to consider if the effect of economic inequality on all this. We can imagine many kinds of tax and trading systems. Some might be confined to individual states, and others to regions. It is possible that such a scheme would eventually be global. With a global scheme, however, you need to consider the willingness of the relatively affluent to pay thousands or tens of thousands of dollars to maintain elements of their carbon-intensive lifestyles. This could mean that people of lesser means get squeezed even more aggressively. It could also create an intractable problem of fraud. A global system that transfers thousands of dollars on the basis of largely unmeasured changes in lifestyle could be a very challenging thing to authenticate.

These kinds of problems lie in the relatively distant future. Moving to a national economy characterized by a meaningful carbon price is likely to take a decade. Moving to a world of integrated carbon trading may take even longer. All that admitted, the problems of increasing marginal value of carbon and the importance of economic inequality are elements that those pondering such pricing schemes should begin to contemplate.

This depends on how possible it ends up being to substitute other things for carbon. If there are things people still want that can only be had (or only had economically) on the basis of relatively high carbon emissions, a tax-only policy will have an impossible time limiting their usage.

This is the breakthrough we have been waiting for. Senators Lieberman and Warner have achieved something I thought impossible one year ago – they have written a climate bill that has a very real chance of passage. They demonstrated a clear commitment for meeting critical objectives of the business and environmental communities while bringing together their colleagues on both sides of the aisle. We are optimistic about their vision and look forward to working with them to make this bill a reality.

I am very excited about the prospects of moving this bill through the Environment and Public Works Committee. The bill will reduce U.S. greenhouse gas emissions at an ambitious yet achievable rate through 2050, it will use a suite of market-based measures to do so in the least costly way possible, and it will drive deployment of the climate-friendly technologies we need to fight climate change while growing our economy. I remain hopeful that this process, combined with the effort being led by Chairman Dingell in the House, will yield a law by next year.